Archive for Economics

Unfortunately, Lord Young is probably right!

Posted in economics, Politics with tags , , , , on November 19, 2010 by Tom Leatherbarrow

The furor over Lord Young of Grafham’s comments over British standards of living are insensitive, likely to be viewed as Thatcherite and embarrassing to the Prime Minister – but he’s probably right!

For those not in the know, Lord Young is an unpaid adviser to the current Prime Minister having previously been at the Department of Trade and Industry under Margaret Thatcher. Beneath that kindly uncle exterior however lies an unreconstructed right winger who famously took on Norman Tebbit over the running of the 1987 Election Campaign. You’ve got to have some balls to do that!

Anyway, echoing Harold MacMillan’s famous words that “you’ve never had it so good” Lord Young has told the British public that historically low interest rates of 0.5 per cent mean that we are all paying back much less on our monthly mortgage costs which means that we’ve never had so much disposable income. As you can imagine, this has set off a right old battle with the current PM publicly distancing himself from the comments.

Intriguingly however, almost exactly the same argument was made to me by a client about a week ago, namely that low interest rates are a legal drug we are all going to have to wean ourselves off.

Why? Because the medium term risk is not a double-dip recession but inflation, due to the huge amounts of extra money that have been pumped into the economy, firstly via low interest rates and secondly by quantitative easing or printing money.

The traditional British blunt instrument for dealing with inflation has been higher interest rates which takes money out of people’s pockets. What are the timescales for this? Difficult to say but it is interesting to note that one member of the Bank of England’s Monetary Policy Committee voted in favour of a quarter point rise in rates at the last meeting.

Why then, if he is right, have his comments been received with such scorn? I suspect it’s because, despite the cash windfall many of us have chosen not to spend but to pay off credit card debts plus the state of the economy has left us worrying about job security. It may be that we have never had it so good, but unfortunately many of us are not feeling that great at the moment.

MPC Member: “We need to talk this up now”

Posted in economics with tags , , , on November 16, 2010 by Tom Leatherbarrow

Not my words but the words of one member of the Monetary Policy Committee to a client of mine a few weeks ago. The man in question, Andrew Sentance, is concerned that, despite all the ingredients being in place for economic recovery, we will manage to snatch defeat from the jaws of victory.

And he should be concerned if you look at today’s business pages dominated by the financial crisis (sorry ‘contagion’ must remember to be more hyperbolic) in Ireland.

However, it is noticeable that the negative news bias is increasingly bearing no relation to company and market performance. The FTSE 100 has moved up nearly 1,000 points since July and today’s company results show enormous progress across a swathe of sectors. EasyJet has seen profits triple in the last six months. ITV has seen revenues rise by 16 per cent due to an advertising recovery (yes you read that right, an advertising recovery!). Luxury fashion brand Burberry has reported a 49 per cent rise in first half profits. British Land reported a 4.2 per cent rise in net asset value.

These are all very positive results in sectors, namely luxury goods, air travel, property and advertising which have been, excuse my language, mullered in recent years.

So in my self-appointed role as the guardian of economic optimism, we need to heed Andrew Sentance’s words and start talking this up!

That sound you can hear is a script being torn up!

Posted in economics with tags , , , on October 26, 2010 by Tom Leatherbarrow

Today’s ONS statistics which detail a better than expected 0.8 per cent growth in the UK economy during July, August and September only confirms I suspect what most of us in the private sector have been quietly thinking for some time, namely “things are going quite well aren’t they?”

I’ve had chance to talk to a number of companies in the manufacturing sector (traditionally the poor relation of the British economy behind the financial and service sectors) in the last few weeks and the message has been very positive. Strong order book, good sales pipeline, nobody is getting ahead of themselves, but almost everyone is feeling good about their prospects. All this is confirmed by the ONS today which shows industrial production grew by 0.6 per cent in the third quarter. Now if manufacturing is doing well we must be doing something right!

Of course the elephant in the room is the potential impact of the Comprehensive Spending Review. As a subcontract manufacturer said to me last week “we’re doing well, but it’s fragile”. Like everyone else he is hoping that George’s cost cutting does not damage this upturn.

One last point and it is a topic I am unashamedly returning to, namely the fact that we could talk ourselves into another dip. The media has a negative news bias and I suspect many prepared doom and gloom scripts from correspondents standing outside the Treasury are being ripped up as I write this. Let’s hope they have to keep on ripping in the months ahead!

Could the media talk us into a double dip?

Posted in business, economics, Media with tags , , on July 26, 2010 by Tom Leatherbarrow

What is the biggest worry for business at the moment?  Lack of bank lending?  Austerity measures?  Public sector cost-cutting?  Well the answer is none of the above, at least amongst senior management at a number of firms I have talked to over the last few weeks.

Apparently, the biggest fear at the moment is the media.  How so?  Well there are concerns that media negativity about the state of the economy will hit consumer and business confidence, sending us into an economic tailspin when things for many are actually going quite well at the moment.  The word from two UK manufacturers I have spoken to recently is of strong sales, good pipeline and increasing confidence.  The feeling is that the both business and the public in general have held back investing for long enough and are now dipping into their pockets once again.  Of course this isn’t true of all sectors (the cuts to the school building programme were another knife in the back of the construction sector) but it is clear that consumer and business confidence are in reasonable health, which is good in the circumstances.

However, confidence is fragile.  I vividly remember having dinner with David Smith, economics editor of the Sunday Times a few years ago (namedropper, moi?) and he readily admitted that there is a bad news bias which can easily affect both business and consumers.  Therefore, at times like this I think we should all use our own judgment rather than just rely on the headlines.  Smith famously has his skip test to gauge economic activity (ie. consumer confidence is directly related to the number of skips in his road from people undergoing house renovations) while I look out for new cars on driveways, and ‘sold’ signs in front of houses.  At present both of these indicators are positive, at least where I live.

My gut feeling is that we will weather this (Friday’s GDP figures were another welcome boost) as most businesses are now very lean and we have stored-up demand due to the fact that nobody has spent anything over the last few years.  Barring major shocks, this should be enough to see the private sector through. 

The public sector is another matter entirely.  As one client put it to me a few weeks ago, “I think they are going to feel some of the pain the private sector felt 12 months ago.”


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